A Korean beverage company plans to set up a subsidiary in India to manufacture fruit juice. Based on projected annual sales of 40,000 bottles, cost…

CA Intermediate · Cost and Management Accounting · MTP · January 2025
A Korean beverage company plans to set up a subsidiary in India to manufacture fruit juice. Based on projected annual sales of 40,000 bottles, cost analysis has provided the following estimates for the Indian subsidiary: Total Annual Costs (₹) Percentage of Total Annual Cost which is Variable Material 3,15,000 100% Labour 1,40,000 75% Factory Overheads 1,35,000 50% Administrative Overheads 50,000 35% The fruit juice produced in India will be sold through manufacturer's representatives, who will earn a commission of 10% of the sales price. Expenses from the Korean office will not be allocated to the Indian subsidiary. Required (i) COMPUTE the sale price per bottle to enable the management to realise an estimated 10% profit on sale proceeds in India. (ii) CALCULATE the break-even point in Rupee sales and also in number of bottles for the Indian subsidiary on the assumption that the sale price is 19 per bottle.

Suggested Answer and Working Notes:

(i) Computation of Sale Price Per Bottle Output: 40,000 Bottles (₹) Variable Cost: Material 3,15,000 Labour (₹ 1,40,000 × 75%) 1,05,000 Factory Overheads (1,35,000 × 50%) 67,500 Administrative Overheads (₹ 50,000 × 35%) 17,500 Commission (10% on 8,00,000) (W.N.-1) 80,000 Fixed Cost: Labour (₹ 1,40,000 × 25%) 35,000 Factory Overheads (₹ 1,35,000 × 50%) 67,500 Administrative Overheads (₹ 50,000 × 65%) 32,500 Total Cost 7,20,000 Profit (W.N.-1) 80,000 Sales Proceeds (W.N.-1) 8,00,000 Sales Price per bottle (₹ 8,00,000 / 40,000 Bottles) 20 (ii) Calculation of Break-even Point Sales Price per Bottle = 19 Variable Cost per Bottle = 5,85,000 (W.N.-2) / 40,000 Bottles = 14.625 Contribution per Bottle = 19 -14.625 = 4.375 Break -even Point (in number of Bottles) = Fixed Costs / Contribution per Bottle = 1,35,000 /4.375 = 30,857 Bottles Break- even Point (in Sales Value) = 30,857 Bottles × ₹ 19 = 5,86,285/- Working Note W.N.-1 Let the Sales Price be 'x' Commission = 10 x / 100 Profit = 10 x / 100 X = 6,40,000 + (10x / 100) + (10x / 100) 100 x - 10x - 10x = 6,40,00,000 80 x = 6,40,00,000 X = 6,40,00,000 / 80 = 8,00,000 W.N.-2 Total Variable Cost (₹) Material 3,15,000 Labour 1,05,000 Factory Overheads 67,500 Administrative Overheads 17,500 Commission [(40,000 Bottles x 20) x 10%] 80,000 Total 5,85,000

Topics: Marginal Costing

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